Free shipping is one of the most powerful incentives for online shoppers. According to a recent report, 80% of consumers expect free shipping when ordering a certain dollar amount of products, and 66% expect free shipping for all online orders1. However, offering free shipping on every order can be costly and unsustainable for many e-commerce businesses. That’s why setting a free shipping threshold can be a smart strategy to increase your average order value (AOV) and your profits.
In this article, we will explain what a free shipping threshold is, how it affects your AOV, and how to determine the optimal threshold for your business. We will also share some tips and best practices to implement your free shipping threshold effectively and increase your conversions.
What is a free shipping threshold?
A free shipping threshold is the minimum amount that a customer needs to spend on your online store to qualify for free shipping. For example, you might offer free shipping on all orders over $75. A free shipping threshold is a way to encourage customers to add more items to their cart and increase their order value, while also covering some of the shipping costs for your business.
How does a free shipping threshold affect your AOV?
Your AOV is the average amount of money that a customer spends on your online store per transaction. It is calculated by dividing your total revenue by the number of orders. For example, if your total revenue for a month is $10,000 and you have 200 orders, your AOV is $50.
Your AOV is an important metric to measure the performance and profitability of your e-commerce business. By increasing your AOV, you can increase your revenue without increasing your marketing costs or customer acquisition costs. You can also improve your profit margins by reducing the percentage of your revenue that goes to shipping costs.
A free shipping threshold can help you increase your AOV by creating a psychological incentive for customers to spend more. Customers perceive free shipping as a valuable offer and a way to save money. They also want to avoid the feeling of missing out on a deal or paying for something they don’t have to. Therefore, they are more likely to add extra items to their cart to reach the minimum amount required for free shipping, even if those items cost more than the shipping fee itself.
For example, if your AOV is $50 and your free shipping threshold is $75, a customer who has $50 worth of products in their cart might decide to add another $25 product to get free shipping, instead of paying $10 for shipping. This way, you increase your AOV by 50% and your gross profit by 30%, assuming a 40% gross margin.
How to determine the optimal free shipping threshold for your business?
There is no one-size-fits-all formula for setting your free shipping threshold. The optimal threshold depends on various factors, such as your product prices, your shipping costs, your profit margins, your customer behavior, and your competitive landscape. However, there are some general steps and guidelines that you can follow to find the best threshold for your business.
Step 1: Calculate your current AOV
The first step is to calculate your current AOV using the formula mentioned above. You can use your e-commerce platform’s analytics or a tool like Google Analytics to get this data. You should also segment your AOV by different criteria, such as product categories, customer segments, sales channels, and time periods, to get a more granular and accurate picture of your customer spending patterns.
Step 2: Calculate your average shipping cost
The next step is to calculate your average shipping cost per order. This is the amount that you pay to ship your products to your customers, including the packaging, the carrier fees, and any taxes or duties. You can use your shipping platform’s reports or your accounting software to get this data. You should also consider the variations in your shipping costs depending on the destination, the weight, and the size of your orders.
Step 3: Calculate your break-even point
The break-even point is the minimum order value that you need to cover your shipping costs and maintain your current profit margin. You can calculate it by dividing your average shipping cost by your gross profit margin. For example, if your average shipping cost is $10 and your gross profit margin is 40%, your break-even point is $25. This means that if you offer free shipping on orders below $25, you will lose money on every order.
Step 4: Add a percentage to your current AOV
One way to determine an appropriate threshold for free shipping is to add a percentage to your current AOV. This percentage should be high enough to motivate customers to spend more, but not too high to discourage them from buying. A common rule of thumb is to add 30% to your current AOV. For example, if your current AOV is $50, with the 30% increase, it becomes $65. This new number is what you’ll set your free shipping threshold at.
However, this method is not always accurate or optimal, as it does not take into account your break-even point, your customer behavior, or your competition. Therefore, you should also consider the following factors before setting your final threshold.
Step 5: Consider your break-even point
Your break-even point is the minimum threshold that you need to set to avoid losing money on free shipping. However, you might want to set a higher threshold to increase your profits and offset the shipping costs. Ideally, your free shipping threshold should be slightly above your break-even point, but not too far from it. For example, if your break-even point is $25, you might set your free shipping threshold at $30 or $35, depending on your product prices and customer behavior.
Step 6: Consider your customer behavior
Your customer behavior is the way your customers shop on your online store, such as how often they buy, how much they spend, and what products they buy. You should analyze your customer behavior data to understand their preferences, needs, and pain points, and to identify the optimal free shipping threshold that will appeal to them and increase their loyalty.
Some of the questions that you should ask yourself are:
- What is the distribution of your order values? How many orders are below, above, or close to your current AOV?
- What is the elasticity of your customer demand? How sensitive are your customers to price changes and shipping fees?
- What are the cross-selling and upselling opportunities on your online store? How easy is it for customers to add more items to their cart to reach the free shipping threshold?
- What are the customer segments that are most likely to respond to free shipping offers? How can you target them with personalized messages and promotions?
Step 7: Consider your competition
Your competition is the other e-commerce businesses that sell similar products or target similar customers as you. You should research your competition to understand their pricing and shipping strategies, and to position your online store accordingly. You should also monitor your competition’s performance and customer feedback to identify their strengths and weaknesses, and to find gaps and opportunities in the market.
Some of the questions that you should ask yourself are:
- What are the free shipping thresholds of your main competitors? How do they compare to yours?
- What are the unique selling propositions of your online store? How do you differentiate yourself from your competitors?
- What are the customer expectations and perceptions of free shipping in your industry or niche? How can you meet or exceed them?
- What are the best practices and trends in free shipping in your industry or niche? How can you adopt or innovate them?
How to implement your free shipping threshold effectively and increase your conversions?
Once you have determined the optimal free shipping threshold for your business, you need to implement it effectively and communicate it clearly to your customers. Here are some tips and best practices to help you do that:
- Display your free shipping threshold prominently on your website, especially on your homepage, your product pages, and your cart page. Use banners, pop-ups, or countdown timers to catch your customers’ attention and create a sense of urgency.
- Use clear and consistent language to describe your free shipping offer. Avoid using vague or confusing terms, such as “free shipping on select items” or “free shipping on eligible orders”. Instead, use simple and specific terms, such as “free shipping on all orders over $75” or “free shipping on orders of $75 or more”.
- Show your customers how much they need to spend to qualify for free shipping. For example, you can display a message on your cart page that says “You’re only $15 away from free shipping” or “Add $15 more to your cart and get free shipping”. You can also show a progress bar or a percentage indicator to visualize their progress towards the free shipping threshold.
- Suggest relevant and complementary products that customers can add to their cart to reach the free shipping threshold. For example, you can display a section on your cart page that says “You might also like” or “Customers who bought this also bought” and show products that are similar or related to the ones in their cart. You can also use a tool like Shopify’s Product Upsell app to create custom upsell offers based on your customers’ cart value, product selection, or location.
- Test and optimize your free shipping threshold regularly. You should monitor and measure the impact of your free shipping threshold on your key metrics, such as your AOV, your conversion rate, your revenue, and your profit margin. You should also run A/B tests to compare different thresholds and see which one performs better. You should also adjust your threshold according to seasonal changes, customer feedback, or competitive moves.
Conclusion
Free shipping is a powerful tool to increase your average order value and your profits. However, you need to set your free shipping threshold to a happy medium, where you can increase sales but not so much that you deter customers from buying.